How UK Separation from EU affects US Economy

By Jordan Hicks on 2016-12-03

A brief overview of possible outcomes of the United Kingdom's exit from the European Union on the American economy.

There’s been much chatter about the web and in the media lately as to the effect that the United Kingdom’s exit from the European Union will have. Some of those voices are trying to assure the American people that this turn of events will have little to no effect on America’s economic standing, others fear the worst of things. The truth no doubt will lay somewhere in the middle. Already the dominos have begun to fall changing the order of things in the European sector, and it is sure to have an effect on not only the American economy, but on the relations between the U.K. and the rest of the European Union nations as well. Since the vote for Brexit (as is now being called in the media), several other nations of a far right-wing nature have called for votes to exit the E.U. as well, including France and the Netherlands. Leanings suggest that Germany is close to follow. On top of that, it is possible that Scotland and Northern Ireland may vote to leave the U.K. for fear of being cast adrift from the rest of Europe.

Politically speaking, a governmental crisis is in effect in the U.K. As David Cameron has already announced his resignation as prime minister and conservative party leader. Due to this, its likely a new conservative administration with distinctly more anti-E.U. leanings will replace him. The U.K. will need to be careful with next steps so as not to take a hit at the other E.U. capitals who could see Brexit as a blow to European unity. For that reason, the U.K. may be in position to lose the good favor of the other capitals thereby losing their generous offers in trade; a distraction from other more urgent business in Europe.

To set out a list of possible outcomes could be quite time-consuming and possibly endless, but we’ll attempt to cover a few of the more likely possibilities. First off, you can relax about any immediate changes to immigration status, the new prime minister will have his hands quite full with other larger concerns. In point of fact, the Leave campaign has already said even after Brexit negotiations come to a close, foreign nationals in the U.K. will still be allowed to stay. Jonathan Portes, former Treasury economist wrote, “given we have no population register, and that E.U. nationals are not required to have visas, we won’t actually know who is here on 23 June.” The most likely arrangement will be that suggested by UKIP’s migration spokesman, Steven Woolf who said that anyone whom registered for the National Insurance number prior to the referendum would be guaranteed residence rights. And over the next two years, while Brexit negotiations take place, free movement of E.U. workers will still apply, however their immigration status will be somewhat uncertain.

Secondly, we can expect higher inflation meaning imports will become more expensive. As prices have been stable for so long, this will no doubt be an unfamiliar situation for many. Some economists may welcome a bit of inflation as a stimulant to economic activity, preventing a long-term slump as it was in the Japanese markets. The effect of inflation in the banking sector is where there should be some real concern. The Bank of England is legally required to keep it as close to 2 percent a year as possible; the fall of the pound threatens to push prices up faster than expected requiring a raise in interest rates. This will have three effects; 1) deposits in pounds will earn higher interest, 2) “it reduces demand by putting up the cost of borrowing,” 3) it makes it more expensive for businesses to borrow to expand output. In conjunction, all this could lead to a recession in the U.K.’s economy. Mark Carney, Governor of the Bank of England as well as the Treasury and a range of international economists warned of this possibility before the vote for Brexit, but it seems to have had little effect on the vote itself with many Leave voters failing to believe them. This all changes expectations about their economy’s future performance, leading companies and investors to move money away from Britain in the lack of economic confidence.

Thirdly, while things will begin to happen slowly over time, we do know this will affect our access to the E.U. single market. Companies elsewhere in the E.U. could be less interested in selling to or buying from the U.K. All the extra money the Leave campaign claims will flow into the National Health Service as well as cheaper energy bills will not be available for some time to come, and the U.K. will still have to contribute their net portion to the E.U. funds - about half what the Leave campaign stated - until the end of their E.U. membership.

While these actions amongst the European nations may seem to the untrained eye to have little effect on America, the reality is that this could bring about many negative effects on the United States. The American export sector has suffered over the last few years due in part to lackluster sales in a slow growth Europe, and in part to the dollar’s relative strength to the weakened euro. With the pound now fallen, the euro will likely fall below the dollar as well. More so, Britain has been the main channel by which America asserted agendas into Europe; its exit from that will undoubtedly make it more difficult for America to pursue effects on trade, global tax reforms, and digital privacy in the European sector. Recently our new President Elect Donald Trump, met with Britain’s new Prime Minister Theresa May, to discuss relations between the U.K. and the United States following Brexit. He assured her that he hopes to improve relations with Britain following what has been a decline in good nature during our previous President Obama’s tenure. And as a show of his good intentions he specifically stated that the bust of Winston Churchill which was previously removed from the White House by President Barack Obama would be returned to its rightful place. This may seem a small gesture on the scale of national relations, but the removal of the bust was a blow to relations and respect shown for the U.K. We hope that President Elect Trump will be able to uphold and elevate relations with both the U.K. and with the European Union nations following Brexit as it may be difficult to play both sides of the fence on this issue. And as for the new Prime Minister May, she has recently stated before heading to China for the G20 summit, that she declined to endorse pledges made by the official Vote Leave group, specifically she would not commit to working towards the promise of an extra 100m Euros a week to the NHS, and that she questioned the type of system that admits migrants based on their skills being effective (i.e. the points based system Vote Leave had promised). As these were the two key components promised by the Vote Leave campaign, many of the electorate are upset whom thought they were voting for firm pledges by politicians now senior in May’s government. She left the final closing statement saying, “I’m going to work for what I just said I’m going to work for: the best possible deal for the UK in terms of the relationship that we would have with the E.U., following us leaving.” The next two years promise to be difficult for the E.U. and the U.K. and by association, for the U.S. as well. We can only hope that the more harsh predictions of the future situation in Europe do not come to pass and that relations between the nations continue to be platonic.